Think Social Security is guaranteed?

Dennis Miller is the author of “Retirement Reboot," a book chronicling his
own journey to save his retirement in a low yield, turbulent investing
environment. He works with some of the country’s top investment managers,
authors and analysts to tackle the financial challenges faced by today’s
retirees. Prior to retiring in 2008 Dennis ran a successful consulting business
and authored several books on sales management. He was also a regular
contributor to the American Management Association and an active international
lecturer for 40 years. Dennis is featured regularly on several retirement blogs
and is a frequent guest on radio shows throughout the country. You can track his
exploits at Miller on the Money and on Twitter @DMonthemoney,
or contact him at
milleronthemoney@gmail.com.

Good financial planners use sophisticated computer programs to help us set retirement savings goals. They input dozens of variables based on assumptions about how the world works, and out pops a number telling us how much we should save during our working years.

That number, combined with Social Security and any pension we're lucky enough to have, is supposed to be the Holy Grail of retirement. Reach it and you're set for life.

Not so fast. That thinking can spell disaster. The assumptions that go into those programs are just that, assumptions. They are educated guesses at best, but they could be plain wrong. Your math isn't the problem, and neither is your financial planner — it's the faulty assumption that Social Security, your government pension, or even your "guaranteed" private pension is guaranteed.

In a recent online event, David Walker, former Comptroller General of the U.S., dropped the term "fiscal cancer" and said, "If you point out [the federal government's] total liabilities and unfunded promises for Medicare, Social Security, and a range of other things, it is actually over 70 trillion dollars now, and growing by about six million a minute."

Those are big numbers, but what do they really mean?

David continued: "If we have a debt crisis, you will end up having much higher interest rates, much higher inflation ... [and a] dramatic decline in the stock market. The dollar would probably be hit very hard, and those aren't positive things ... Those aren't conditions that we ever want to see in this country.

"Where do you start? You need a plan. You need a budget. You need performance metrics. We have been in business since 1789 as a republic, and we still don't have those three basic things. No plan, no budget, no performance metrics. No wonder we have a problem."

The problem isn't just Social Security or the federal government. It's cities like Detroit, and even large private companies. I have friends who retired from the private sector with nice pensions. Their former employers went bankrupt and drastically cut their pensions. These friends had hit their retirement savings goals and thought they were set. What was their biggest mistake? Assuming their guaranteed pensions would last forever.

Social Security has changed quite a bit just in the last few decades. Up until the 1980s, benefits weren't taxed. Now, some of them are. Can anyone guarantee there won't be additional changes? No.

When I started working, full retirement age for Social Security was 65. Now it is 67 for most folks. Can anyone guarantee it won't rise even more? No.

There are many ideas for "fixing" Social Security:

Amend the method of calculating inflation to a "chained CPI" which will reduce inflation increases for retirees.

Means testing Social Security, which amounts to benefit reductions for many.

These ideas are all speculation. We don't know what our government will do when faced with a debt crisis. David Walker made it clear:

"Look, the fact is that the government has grown too big, promised too much. It is going to have to restructure. The question is, is it going to restructure prudently and pre-emptively, or is it going to wait until we have a debt crisis and have to do dramatic and draconian things?"

As individual retirees or investors planning for retirement, so much of this is out of our control. Nevertheless, there are steps we can take to protect ourselves even if the assumptions we take for granted turn out to be false. David prescribed the same cure for individuals as he did for the government: A plan; a budget; and performance metrics. Of course, those three tools should leave wiggle room for assumptions that may be erroneous.

Assuming that Social Security or a private or government pension will be waiting for us in its current form is foolhardy. Whether we are working with a financial planner or doing the work ourselves, we need to set savings targets much higher than our "magic retirement number."

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